Robos will be impacted by market dips, and a select few will rise from the ashes
By Gary Manguso, InvestmentNews
Twenty years ago, I joined forces with a group of financial professionals, and we began helping advisors help clients. We focused on what we believed to be the most critical part of portfolio construction – asset allocation. Pivoting off the then new Brinson study, we began to link the independent advisor with investment committees from top tier firms. Sound familiar? It should because robo offerings like Betterment and Schwab share the same emphasis on modeling and academic prowess. In fact, Schwab bases their asset allocation theory around the Brinson Study, and Betterment utilizes a similar model called Black-Litterman that was created by Goldman Sachs just 5 years after the Brinson Study published. We also shared the same focus on ETF’s. The concept is not new; a TAMP released the first publically traded ETF models over 10 years ago.
The timing of the TAMP and robo launches are also eerily similar. Like the robo’s launch in today’s market environment, we too launched our business model at what were then market peaks. In the heady days of the late 90’s, clients were discussing how much they could make, not how much they might lose. They were giddy with yearly gains and the promise of an organized way to make even more was met with open arms. Firms like Janus and Fidelity were the Robos of that era. It wasn’t what asset class or country to buy; it was whether you owned Janus 20 or Magellan. The only question then was, as it seems to be now, what do I need the advisor for?
The TAMP Past/Robo Future
When TAMPs arrived at the scene, advisors jumped onboard to enhance their offerings. They sold the value that TAMP models could provide to their clients by focusing on the appropriate risk model, the ability to hold multiple funds in one account, and the combination of strategic allocation with the more nimble aspects of tactical modeling. Our first generation of TAMPs prospered and clients responded to their advisers being on the same side of the table. It was clear sailing ahead.
The Dot-Com Bubble of 2000-2002 actually promoted the TAMP-advisor partnership. With many fund families’ track records destroyed by the tech wreck, advisors opted for managed portfolios with less or no history, again emphasizing institutional and academic prowess. Clients yearning for help responded well and the business thrived. Imitators were everywhere. Three became thirty, and thirty became hundreds of TAMPS.
Then, 2007 happened. The financial crisis brought massive changes and a vital awareness. Suddenly, market cycles mattered as much as models. The hunt was on for survivors and those that made it through had something other than modeling or academics. The message was clear. It cannot only be about science, there needs to be an art as well. Clients and advisors opted for the most active approach – a combination of both storyline and execution. The clear TAMP winners created a vision for the client where both their advisor and the strategy would never let “it happen again.”
The TAMP response to the crisis varied. SEI added tactical and alternative options to their MPT only based modeling. This was a major departure for a firm whose position was always that tactical allocation had no merit. At Loring Ward, they redoubled their focus on helping their advisors and started to join platforms where the strategic only firm could be coupled with more satellite, active allocation approaches. AssetMark, then Genworth, launched a very successful “Rowing and Sailing” campaign adding large numbers of highly tactical models and also began to introduce liquid alternative solutions. Clearly, these were the right moves. These three firms have all bounced back from potentially crippling AUM drops and have regained leadership roles in the industry.
Because of their focus on academia and launch in a thriving market period, robos will be impacted by a market dip. The industry will need to refocus, and few will rise from the ashes. When competing with a robo, remember this story and explain how asset allocation is a combination of science and art. We learned from our experience, let’s wait and see what the robos learn.
Gary Manguso is the Vice President – Product Strategy at FTJ FundChoice.